Monday, October 19, 2009

FCPA Collateral Effects and Those "Pesky" Shareholders

I previously posted (see here) that while there is little in terms of substantive FCPA case law - this much is clear - there is no private right of action under the FCPA - enforcement of the law is in the hands of the DOJ and the SEC.

That does not mean that aggrieved third parties, including a company's own shareholders, are without legal recourse should a company become subject to an FCPA enforcement action or merely disclose a potential FCPA issue.

Indeed, shareholder derivative litigation is often a collateral effect of FCPA disclosures or enforcement actions.

Case in point, the shareholder derivative complaint filed last week on behalf of Pride International, Inc. in Texas state court against certain members of its board of directors and certain of its executives officers seeking to remedy defendants' breach of fiduciary duties. (see here).

The breach?

According to the complaint, "[f]rom 2001 to 2006, Pride repeatedly violated the [FCPA] through its business operations in numerous countries." (see para. 1). "Certain current and former officers and directors of the company were aware of the violations and that the violations could, and eventually did, cause substantial harm to Pride and its shareholders, yet they knowingly failed to make a good faith effort to correct or prevent the misconduct." (see para. 1).

The complaint alleges at para 23 that "[t]he individual defendants were aware of the violations well before the company announced the FCPA Investigation to the company's shareholders and the public at large." "Nevertheless," according to the complaint, "the Individual Defendants took no action until an undisclosed employee of the company complained about the violations."

The complaint then details Pride's numerous public statements - beginning in March 2006 - regarding its potential FCPA issues and exposure. Certain of these disclosures and statements have been covered elsewhere (see here and here).

Beyond re-stating Pride's numerous public statements, the complaint is sparse on detail, including little specific factual evidence to support the allegation that the Director Defendants "knew or were reckless in not knowing of the Company's violations of the FCPA." (see para. 50).

Regardless of the complaint's ultimate fate, the Pride derivative suit is but the latest example of the collateral effects / sanctions a company will likely face when its business conduct is subject to FCPA scrutiny.

For those keeping track at home, such collateral effects / sanctions are yet another reason for companies to have effective, robust and well-communicated FCPA compliance policies and procedures which are periodically monitored and strengthened.